The continuing debt crisis in Europe is a reminder to investors that we are still in the midst of the Global Financial Crisis (GFC) which first gripped the markets back in 2008. The G20’s first cunning plan to spend their way out of trouble didn’t do much to fix the root causes of the GFC and so they are gathered once again for another talkfest which at best, might give the markets a kick upwards for a few days.
We are now near the end of 2011 and yet the global economy is still dealing with many of the same issues as it was back in late 2008 after the Lehman Brothers collapse. This time however there is a lot less money to throw around plus Chinese economic growth is slowing.
Back in early 2010 however the G20 Finance Ministers and Central Bank Governors were patting themselves on the back because they reckoned the worst of the GFC was over. On the 23rd April 2010 they released a communiqué after their gathering in Washington which included this gem:
“The global recovery has progressed better than previously anticipated largely due to the G20?s unprecedented and concerted policy effort. ”
I didn’t agree with their rosy view and after the G20 meeting I wrote an article entitled Another G20 love-in, the global recovery and China.
In that article I summed up my view of the global economy at that time as follows:
“At present the global economy is slowly recovering, but the big spending policies of the G20 are going to cause problems for many member nations in years ahead.
So rather than lavish themselves with praise, perhaps the G20 meeting member’s could show a little more humility and acknowledge the fact that all they have really done so far is spend their way of of trouble. Maybe their policies have worked, but I reckon it is far too early to declare mission accomplished at this stage.”
Alas as I write today the G20 crowd are now dealing with the problems they created by trying to spend their way out of trouble just as I suggested.
The question for stock market investors is how might the continuing GFC play out and what impact with this have on the Australian stock market.
To assist in trying to answer that question let’s look at the candlestick chart over 4 years for the S&P/ASX 200 Index.
S&P/ASX 200 Index (XJO) 4 year candlestick chart
On the chart above I have highlighted what I see as the 4 main stages of the GFC (so far) in terms of how they have impacted the ASX 200.
I am using monthly candlestick chart as this best shows how stocks were swinging up or down and clearly shows the periods when the market was falling or rallying. A red candlestick means the market fell for the month, blue or black means the market rose.
Stage 1 of the GFC hit the S&P/ASX 200 in late 2007 after the market hit an all time high of just over 6700. (yes the ASX 200 was once up that high) As you can see from the candlestick chart, stocks fell in all but three months between November 2007 and February 2009. That was quite a slump!
Stage 1 was all about shock. First the financial crisis struck in the U.S. but it then quickly spread and suddenly everyone appeared to be tracking the daily movements of the LIBOR. The fear back then was that the financial markets would seize up.
During the middle of 2007 the ASX 200 paused around the 5000 level and at that point I thought we were near the bear market bottom. But then Lehman Brothers imploded and markets around the world took another plunge downwards.
Finally the ASX 200 did find a bottom in early March at around 3100 points (yes the ASX 200 did get that low) and this heralded the beginning of Stage 2.
The Australian stock market rallied during Stage 2 largely because many G20 nations decided to borrow and spend in an attempt to get their economies going. Luckily for Australia, China also announced plans for a massive economic stimulus programme and that sent commodities prices for iron ore & coal for example heading towards historic highs again.
The stock market also rallied because it was oversold and investors were tempted to buy into a market in which there appeared to be a lot of cheap high quality stocks.
Generally speaking 2009 was a good one for stocks and if you look at the candlestick chart you can see that from March to November 2009 there was only one month where the ASX 200 fell back.
By the end of 2009 however, investors were once again starting to worry about debt and the strength of the global economic recovery, consequently the stock market rally fizzled out. Hence Stage 3 of the ASX 200’s journey through the GFC begun. (indicated on the chart by the grey line)
Basically Stage 3 involved investors waiting to see what would happen. I refer to this period as the “Twilight Zone” and first wrote about such a period in July 2009 in The Economic Twilight Zone.
There were a few moments during which the stock market bounced around, but the overall trend from late 2009 until early 2011 was sideways. As you can see from the ASX 200 candlestick chart above not much happened and it was trading around the same level in late 2009 as it was in March 2011.
Then around April 2011 the ASX 2oo entered Stage 4 and the Global Financial Crisis became increasingly focused on Europe. Investors by this time had accepted that the U.S. economy would struggle for years and now the major concern was how bad would it get in Europe.
It’s impossible at this point to judge how long it will take the European Union to deal with it’s debt crisis. Once they deal with Greece they will then need to focus on Italy (as they are starting to do now) while keeping an eye in Ireland, Spain & Portugal as well.
At the same time the U.K economy looks feeble, the French economy may enter a recession and even the Germany economy is showing signs of weakness.
I have highlighted Stage 4 on the ASX 200 candlestick chart using a circle which is my way of saying it’s a work in progress. I am not sure how this stage will play out but my guess is it will be followed at some point by a stage that will be all about China.
So where will the S&P/ASX 200 Index go from here? The short and honest answer is that I don’t have a clue. There are many unresolved issues that could push the market lower or higher such as the mining tax, the possible removal of Gillard as Prime Minister, an early election and the carbon tax.
On top of these Australian domestic issues we don’t know by how much the Chinese economy will slow, how bad things will get in Europe and who will be running the show in the U.S. after next years presidential election.
So it’s hard to pick which way to market will go over the next few months but despite all the gloom, I still think there is a chance of an end of year rally. But I don’t think this will set up the next bull market and the chances are we will see another wave of selling if the numbers coming out of China worry the markets.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp